Want to save? Here's how

emember the story about the hare and the tortoise?

It's a nice lesson in persistence and perseverance for little children.

What we tend to overlook is the fact that it also holds a smart principle that you can apply to your savings plan: Play the game wisely and you could end up winning by a long shot.

Saving is easy when money is thrown into your lap and all you have to do is decide what to do with it. But how often do we land up with a huge bonus (once a year if you are lucky?) or an inheritance from some relative (once in a lifetime!)?

The key to being smart is to pay yourself some money every month.

As a kid, your parents probably gave you pocket money every month. Today, your company pays you a monthy salary.

Why don't you also pay yourself every month?

Bonus or not.

Increment or not.

Gifts from visiting relatives or not.

Before you clear your cell phone bills, shop, eat out or pay your rent, pay yourself.

The idea is that if you put this money away automatically, you will not be tempted to spend it -- since you don't have it!

This will force you to save regularly.

Sounds good? Then read on. Here are some options that will help get you disciplined:

• Recurring Deposits

These are fixed deposits with a difference.

How it works

In a normal fixed deposit, you put in an amount and, after a specific period of time, you are free to withdraw it. Meanwhile, you do not touch the money or add to it.

A recurring deposit works on a similar principle. The difference is: instead of putting in a bulk amount, you put in a specified amount (which you decide when you open your recurring account) every month. This could be a small amount that will not pinch your pocket or make a dent in your lifestyle.

At the end of the tenure, you get a nice amount. And the interest that you earn -- to a maximum of Rs 12,000 per year -- is exempt from tax (under Section 80L of the Income Tax Act, 1961).

There are two ways you can open a recurring deposit:

1. With your bank. 

How it works

Your bank automatically deducts a fixed amount from your savings account.

So, every month, when your salary cheque is put in your account, your bank will debit the amount you initially agreed upon and credit it to your recurring deposit account.

If you tell them to put in Rs 1,000 every month, this amount will automatically move from your savings account to your recurring deposit account. So with no effort on your part, at the end of 12 months, you will have Rs 12,000 to which you can add the interest the bank will give you.

With banks, you determine beforehand how much you would like to put in every month and that is how it stays -- you cannot change that figure till the end of your recurring term. So if you fix it at Rs 1,000 every month, that is the amount that will move to your recurring account -- nothing more, nothing less.

What you should know

~ Though banks score high on convenience, they offer lower returns.

The rates vary from three percent to seven percent per annum.

~ Banks offer you flexibility, in that you can start with a term that is as low as one year onwards.

2. With the local post office

So, as far as recurring deposit options are concerned, you will either make a trip to your local post office or tell your local bank that you would like a recurring deposit option.

The tenure of the deposit, the interest rate and the minimum amount to be regularly deposited will vary from bank to bank.

• Public Provident Fund

This one is the darling of all investors because of its powerful tax benefits.

How it works

You will get a rebate (as a result, you pay lesser tax on your total income) on the amount you invest. And the interest that you earn  -- which is 8.5 percent per annum as of now -- is tax free. This means you don't pay tax on what comes into your hand and you get a rebate on what you put in.

That's not all.

There is lots of flexibility on how much to invest. No fixed investment is required.

You can go as low as Rs 100 a year or as high as Rs 60,000.

You can open an account at any head post office, GPO, selection grade post office, any branch of the State Bank of India or select branches of other nationalised banks.

What you should know

So if you are 20 years old right now, think of all the money you will get by the time you are 35.

It is a great investment if you are prepared to block your money for a long time.

• Systematic Investment Plan

Mutual funds offer the SIP option which works on the same principle as regular investing.

How it works:

Assume you deposit Rs 1,000 on a monthly basis in a mutual fund.

If the Net Asset Value the fund is quoting at Rs 50, you will get 20 units of the fund (See Mint money with mutual funds).

If the NAV drops to Rs 20 the next month, you will get 50 units. If it rises to Rs 60, you will get 16.7 units.

So, over time, the number of units you own in the fund increases. 

You end up buying more units when the market is down (and the NAV is lower) and you buy fewer units when the market rises (and the NAV, as a result, is higher).

With no dent in your pocket, just five months down the road, you own a certain amount of mutual fund units. Take another look at this example:

If you do not wish to invest in an equity fund, you can try a debt fund.

Also, there is no need to invest only in one fund. You can even try small amounts in different funds.

The key to remember is that, irrespective of where you put your money, you must set aside a small amount every month.

Remember, slow and steady wins the race!

DON'T MISS!

Mint money with mutual funds

How to make a million

What's your money IQ?

Select the right mutual fund

Image: Dominic Xavier